The Threat the Coronavirus Poses to the Economy
In 2005, the National Science Foundation, World Bank and other American and global organizations convened to discuss the threat of avian flu. The scare turned out to be short-lived and isolated, involving about 300 cases and 175 deaths worldwide. The economic effects were largely confined to chicken producers in China and Vietnam.
The potential economic and human threat from the coronavirus pandemic looks very different. Economists have studied the impacts that natural disasters, terrorist attacks—and epidemics—have on the economy. The evidence shows that the costs ultimately depend on whether the shock persists or dissipates quickly—and whether the damages it inflicts are localized, nationwide, or even worldwide. That’s why terrible hurricanes, heat waves, and 9/11 have not had broad economy-wide effects. Luckily, that was also the case with the Avian flu and the Ebola scare.
But a coronavirus pandemic could be a shock that affects much of the country and economy. It won’t go away quickly, despite how much the president would like it to.
We do not know yet just how communicable this strain of the coronavirus is, so we cannot predict how quickly it will spread here or how many Americans will be infected. We also don’t know how lethal it is; most of the data thus far have come from China, which has not collected or reported those data in a systematic and transparent way.
If the coronavirus has a two percent mortality rate, as currently assumed by some epidemiologists, it’s very serious. CDC says that strains of the regular flu affected 45 million Americans in 2017-2018 and 35.5 million Americans in 2018-2019. If this coronavirus strain is as communicable as regular flu—meaning 40.25 million will get it—a two percent mortality rate would imply that 805,000 Americans could die from the virus. By these measures, a global coronavirus pandemic could infect 861 million people worldwide with an expected 17.2 million deaths.
If that came to fruition—and let’s certainly hope it doesn’t—the economic fallout would be enormous. Over the past week, the pandemic has begun to slow the economies of China, South Korea and Japan. As a consequence, world oil prices have fallen 15 percent. Those countries are major U.S. export markets, and if their purchases of our goods and services fall appreciably, American unemployment will begin to rise.
The United States is also a very important export market for those countries. In fact, half of our imports from China—and an appreciable share from Korea and Japan—are inputs used by U.S. manufacturers to produce their goods. If the pandemic slows the production and exports of those inputs, as is now expected, American manufacturing will slow further and more U.S. unemployment will ensue. If the pandemic spreads widely across Europe, all of these troubling effects will increase sharply.
When everyone had the avian flu one their mind, in 2005, a group of U.S. and international organizations conducted war games, dubbed “Atlantic Storm,” based on a scenario in which bioterrorists unleashed smallpox in New York, Los Angeles, and four major European cities. As the exercise unfolded, it became apparent that much of the expected economic damage would come not from the disease itself, but from the anticipated responses by local, state, and national officials to close state borders, ground transportation systems, and bar people from congregating.
Without the capacity to test or vaccinate for the infection, mayors, governors, even the president may feel forced to shut down the transport of goods and people by aircraft, trains, buses, and subways. Those actions, in and of themselves, would result in systemic economic costs, regardless of whether the coronavirus actually spread pervasively. Of course, if those shutdowns are short-lived, the economic damage will be manageable. But if they persist, largely because there are no effective treatments and the virus will spread in waves, the shock to the economy could be protracted and pervasive. Everything could slow at once – consumption, investment, employment and incomes — and economic costs would be enormous.
The coronavirus threat is already driving some people to avoid places where other people gather—an immediate blow to restaurants, hotels, airlines, theaters and sports teams. Past evidence suggests that most people would keep on working until the virus severely affects their city or town. If it spreads across much of the country, however, it could freeze much of the labor force and shut down a huge portion of the American economy.
When the Bush administration was broadly criticized in 2005 for its lack of preparation for a possible avian flu pandemic, it responded by beefing up resources, including the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH), which the Obama administration expanded further.
The Trump administration reversed those policies by cutting or slowing funding for the CDC and NIH — including cuts for “emerging and zoonotic infectious diseases” and dismantling the government’s pandemic task force. Those short-sighted decisions were rationalized by saying they would save the taxpayers money. If the worst case scenario comes to pass, as it may, they could, quite literally, cost many lives and trillions of dollars.
This essay was originally published in Washington Monthly, March 2, 2020.